The Complete Guide To Personal Loans
Updated July 6, 2018
What Is A Personal Loan?
A personal loan is a tool that you can use to assist in financial situations, such as education, home maintenance, emergencies, and even paying off other debt.
Although you probably have no intention of adding any debt to your life, there are certain circumstances in which it is helpful, and personal loans can give you just that -- without the high-interest rates and fees, like those of a credit card.
The Credit Review wants to make sure you understand all the ins and outs of personal loans before making any big decisions, so we've compiled a guide on some frequently asked questions regarding personal loans.
Why Should I Take Out A Personal Loan?
A personal loan is taken out by individuals to be used for many situations, such as:
- Debt consolidation and paying off other debt: Taking on more debt may sound like a terrible idea but in some cases a personal loan can help you pay off existing debt. If you have credit card debt or other debt that has a higher interest rate than what you can get for a personal loan, this is a great way to pay it off and save money in the long run. You can also consolidate your debts into one large debt with one interest rate to pay it off. Another option (in the case of bad credit) to consider is a debt relief program, which could reduce resolve your debt in 24-48 months.
- Renovating and maintaining your home: In addition to upgrading your home, you may need extra cash on hand in case of a home emergency, such as a broken air conditioner during the summer. You can use any savings you have for this kind of situation, but if you prefer to keep that for a more immediate use, you can take out a personal loan to keep your nest egg untouched.
- Education: While tuition can be covered by a student loan, you can use a personal loan to cover other student living expenses, such as rent, groceries, and textbooks. The interest rates for a personal loan tend to be lower than credit cards, so it can cover your personal expenses.
- Funding a business: A new business has many startup costs, including office spaces, permits, materials, and rent. A personal loan prevents you from using your own living expenses and covers you until you begin making revenue with your new business.
- Emergencies: Emergencies are inevitable in life. In the case of an injury, you should not have to refuse medical treatment because you cannot afford it. Additionally, you may need access to funds if your vehicle needs repairs or if you are between jobs.
When you apply for a personal loan, truthfully inform the lenders of what you intend to use it for and use it only for that reason since this contract is legally binding. Maintain a good credit score by keeping up with your payments and saving up for an emergency nest egg.
When Should I Not Take Out A Personal Loan?
Although some consumers use their personal loans to finance weddings or vacations, we advise against that since it can lead to more unnecessary debt over time. Spending outside your means can result in buyer’s remorse, so stick to using personal loans for items you need, not want.
What Is A Credit Score? What Score Are Lenders Looking For?
What is a credit score? In simple terms, a credit score is a number that tells lenders how likely you are to pay them back after borrowing money. Your credit score is affected by your payment history, the amount of debt you owe, credit history, new inquiries, and types of credit. If you keep your balances low and pay your bills on time, lenders view you as a trustworthy, low-risk applicant and they are more likely offer you low-interest rates on loans.
A good credit score varies greatly with each lender, and most of them use varied scoring systems to grade consumers. Most credit scores range between 300 and 850. In general, the higher your number, the better your credit score. Most lenders usually follow this scale:
- Excellent credit: 700 - 850
- Good credit: 680 - 699 (the average consumer’s credit score is 682)
- Average credit: 620 - 679
- Low credit: 580 - 619
- Poor credit: 500 - 579
- Bad credit: 300 - 499
If you check your credit score with the three major bureaus (Equifax, Experian, and TransUnion) and it falls around 690 to 720, that is generally considered to be a good score. If you have a 720, your score is considered excellent, and this allows you to qualify for loans up to $100,000. You can check your credit score for free at sites like Credit Sesame.
A bad credit score makes it harder for you to be approved for a loan and results in you having to pay more in fees and interest when you take one out. Most lenders see any borrowers with a score under 620 as risky.
If you are not sure where your credit stands, look here for more information.
If you have good credit, you’re in luck. You do not have to offer collateral for your funds and you can qualify for the maximum loan amount. With a good credit score, you are likely to be approved for loans with low interest rates. However, you can still take out a personal loan from a reputable company even with bad credit.
These perks allow you to shop around with different lenders before deciding on the one that gives you the best rates and payment options. Lenders check your score using a soft pull that does not affect your credit, so check all your options before deciding on a loan.
In addition to checking your credit score and credit history, lenders look at your current financial situation to determine if you qualify for a loan. This includes your debt to income ratio, education, and earning potential.
Are There Alternatives To Personal Loans?
If you need funds or need to pay off high-interest credit card debt, you can use a zero interest balance transfer credit card. However, this 0% APR only lasts a certain amount of time.
Additionally, taking out a secured loan is a less expensive method to pay off debt.
What Are The Types Of Loans And Lenders Available?
When it comes to personal loans, there are two types: secured, which uses collateral and is considered low-risk with a much lower APR, and unsecured, which is based on your credit score.
Your local bank and credit unions may offer personal loans, but you can also look to online lenders with a lower interest rate since this can save you hundreds or thousands of dollars in the long run and a quicker time frame to receive the money.
Many lenders take a few business days to provide the funds, but some offer same day service via a direct deposit.
The best terms for personal credit have low APRs, no prepayment penalties, and no hidden fees. You may also check the BBB (Better Business Bureau) and the FTC (Federal Trade Commission) for lender reviews and ratings.
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